Bubble Bobble was a great game! Nearly as much fun as watching the Bitcoin Bubble predictions.

What the heck is a Bubble?

A bubble is an object that has a large volume/surface area with little intrinsic substance. Bubbles can get bigger and bigger…and then they pop.

An economic bubble is trade in an asset at a price or price range that exceeds the asset’s intrinsic value. What the fuck is intrinsic value? Well, that’s where things continue to get murky (and subjective). One uses fundamental analysis or technical analysis to determine intrinsic value. Some “experts” use top-down analysis (what does the industry look like, what are the macroeconomic factors). Others use bottom-up analysis (what are the specifics of the company).

Here’s the thing. There is no consensus on what the intrinsic value of an asset is. Like market analysis, it’s in the eye of the beholder. Some claim Bitcoin’s intrinsic value is zero but why? With no precedent, there is no reasonable way to determine Bitcoin’s intrinsic value.

Bubbles of the Past, Not That Scary

Tulip Mania was not the tulip bulbs but Future Contracts on tulip bulbs. Two quotes from the Wikipedia article sum it up for me

“In many ways, the tulip mania was more of a hitherto unknown socio-economic phenomenon than a significant economic crisis”

“Many modern scholars feel that the mania was not as extraordinary as Mackay described and argue that not enough price data are available to prove that a tulip bulb bubble actually occurred”

One of the most famous bubbles may not have been a bubble at all.

The Dot-Com Bubble is a modern bubble many of us lived through. I have a different lesson learned than the masses. It’s not that the market was wrong during the Dot-Com bubble, but it was ahead of its time. The NASDAQ peaked at ~5,100 in February of 2000. It recovered in 2015, fifteen years later and is now ~50% higher than its bubble peak (~7,500). There was a bubble but the market recovered with time.

Bubble recovery

The Housing bubble of 2006-2007 took an even shorter time to recover. By 2016, the average US house price was back to the 2006 levels.

Housing Prices

Argument for a Bitcoin Bubble

1,100% price increase since last year

Price increase does not appear to be in step with utilization (hard to say for sure)

Adding “Blockchain” to a company’s name or companies launching their own cryptocurrency (see Kodak) are having a (irrational?) run up in their stock price

People can buy Bitcoin on credit through exchanges like Coinbase

As far as I can tell, all arguments that Bitcoin is a bubble boil down to the fact that its increased in price “too fast”.

Argument Against a Bitcoin Bubble

Bitcoin is special. It’s not a company that can run out of money. It’s not a real-estate market that the government and banks affect. Any comparisons to previous bubbles fall flat due to the uniqueness of Bitcoin

Bitcoin is being used as a value-store. The government cannot manipulate Bitcoin through printing more currency (like gold). Gold’s current market cap is $7.8 trillion. Bitcoin’s market cap is under $200 million. That market for a value store is massive.

Network effects. The more people who have cryptocurrency the more (intrinsically) valuable it is. The enthusiasm around Bitcoin and its price run up has created momentum. More people have Bitcoin than ever. Products, like wallets, exchanges, payment systems and more have been built around Bitcoin. BTC is the default cryptocurrency used to by other cryptocurrencies. Despite is volatility compared to USD, Bitcoin is considered the “safest” cryptocurrency and many flock to it at times of uncertainty.

Macro trends. The world continues to become more connected and more digital. A government controlled fiat currency is not attractive to those in the developing world. A future with separation of Money and State, like the separation of Church and State before it, may be the way to go.

Predicting a Bubble

Like timing the market, predicting a bubble is tough work. Real estate has been around for thousands of years yet most missed the “Big Short” opportunity. The stock market went through the 1929 crash yet the Dot-Com bubble still occurred.

Recently many bears predicted a Venture Capital bubble yet that market continues to be robust. Others have been predicting a US Stock Market bubble for a decade now yet that market continues to grow as well.

Despite having hundreds of years of history with stocks and real estate the “experts” have not been able to predict bubbles. These same experts believe they can predict a bubble in something that has no good precedent to compare it to.

Bottom Line

No one knows if Bitcoin is in a bubble or not and those who say they do are full of shit. Why do people want to claim a Bitcoin Bubble? Are they jealous of those Bitcoin Millionaires? Are they fearful of something they don’t understand? It’s one thing to be bearish on Bitcoin, it’s another to be adamant it’s a bubble.

Like many, I’ve become obsessed with Bitcoin and cryptocurrency. Sure, it’s fun to buy Bitcoin on Coinbase. Checking the price compulsively, the emotional ups and downs. I like that sort of thing but it’s not for everyone. Those who think that’s all Bitcoin has to offer are only looking on the surface. The more you learn about Bitcoin the harder it becomes denying the beauty.

The Origin Story

Bitcoin’s beauty starts with its origin. Satoshi Nakamoto is a pseudonym used by the creator(s) of Bitcoin. There are a couple of theories on who Satoshi could be but no smoking gun. Satoshi may have created this persona to protect the long-term viability of the network. A person or group of people with grand inspirations to change the world but not take the credit. Not as cool as being born to a virgin but that’s a cool birth ;). An origin of mystery.

The Design

Peer-to-peer network, cryptography, immutability, the distributed ledger aka the blockchain. Bitcoin uses these concepts to create a flat, decentralized network where every node is equal. Like the internet before it, this type of design pushes innovations to the edge of the network. This elegant design allows people to innovate as they please on the edges.

Growth

After Bitcoin’s birth on January 3rd, 2009 a handful of developers in the digital/cryptocurrency space downloaded the software. Over the next eight years, as critics ridiculed Bitcoin, the value appreciated to a market cap over $300b. At first, a group of passionate engineers and others improved Bitcoin, built applications around it and promoted the heck out of it. Since then, people in finance, economics, e-commerce and more have flocked to Bitcoin. They helped create an ecosystem that will allow Bitcoin to achieve its potential. People from online poker players, to long-bearded cryptographers, to the Wall Street bros all working to make Bitcoin a success is a thing of beauty.

The Skepticism

For every person involved in the Bitcoin community, there has to be 10 who are skeptical. These people believe Bitcoin is a Ponzi scheme or a scam. At the very least they believe Bitcoin is in a bubble.

In 2017, I like to use Bitcoin as a Rorschach test. Among the reasons for the skepticism, there are common themes that emerge. Some are fun conversations about what is money, what qualities do a currency need to succeed, what is good or bad about our current banking system. Many times Bitcoin skepticism comes from a place of fear. A fear of the complexity of Bitcoin. The fear of change.

Bubble speculation is all the rage. Everyone is a woke investor, cautious to avoid the mistakes of the past. But spotting a bubble is tough and if this is a bubble, it’s not like one we’ve ever seen before.

Fearful when others are greedy and greedy when others are fearful.

The current situation reminds me of this quote attributed to Warren Buffet. How do we interpret this advice with Bitcoin? As many “greedy” types I’ve met bullish about Bitcoin I’ve met many more fearful types. Despite the big run-up, it may still be time to be greedy.

The Bottom Line

It’s fair to be skeptical of the price of Bitcoin. It’s fair to think Bitcoin may not be the cryptocurrency to survive. But do not let the newness, complexity and others’ exuberance shroud your ability to appreciate its beauty. Cryptocurrency is here to stay. It’s changing the world and we’re all going to have to change with it. Enjoy it.